Tidewater Inc.

Good morning. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Q3 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star followed by the number one. I will now turn the call over to Wes Gocher.

Thank you, Colby. Good morning, everyone. Welcome to Sidewaters Earnings Conference call for the three and nine months ended September 30th, 2022. I'm joined on the call this morning by our President and CEO, Quentin Neen, our Chief Financial Officer, Sam Rubio, and our Vice President of Sales and Marketing, Piers Middleton. During today's call, we'll make certain statements that are forward-looking and referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we make during today's conference call. Please refer to our most recent Form 10-K and 10-Q for additional details on these factors. These documents are available on our website at TDW.com or through the SEC at SEC.gov. Information presented on this call speaks only as of today, November 4, 2022. Therefore, you're advised that any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures can be found on our website at TDW.com and is included in yesterday's press release. And now with that, I'll turn the call over to Quinton.

Thank you, Wes. Good morning, everyone, and welcome to the third quarter 2022 Tidewater Earnings Conference call. I'm pleased to say that as the offshore vessel market continued its momentum during the third quarter 2020, we saw meaningful improvement in our profitability and free cash flow generation. The most talked about indicator of the strength in our business average day rate increased by nearly $1,100 per day in the quarter on slightly higher active utilization of 83.7%, which is up about 1.2 percentage points. You may recall that we have previously discussed that fleet-wide average day rate increase over an entire year during a typical up cycle was about $1,500 per day. We passed that benchmark in the second quarter with average day rate up nearly $1,900 and year to date we are now up $3,000 per day. This additional step up in average day rate in the third quarter is emblematic of the tightening of the supply and demand of the offshore vessel market we have been discussing. It was set up by the significant vessel attrition over the past several years and actuated by the increase over the past year in global offshore activity. The increase in global activity began in the third quarter of last year and was based on steadily increasing oil price as global economic activity increased subsequent to the easing of pandemic restrictions and has further increased over the past six months as conflict in Ukraine moved the focus of decision makers to energy security. During the third quarter, we entered into 54 new contracts covering 38 vessels. For those vessels that we entered into multiple contracts during the quarter, each follow-on contract was signed at a materially higher day rate than the first contract. The average duration of the OSB contracts we entered into during the third quarter was approximately four months, which is indicative of our chartering strategy of going short from a contract duration perspective, allowing us to continue to realize further upward pricing momentum in today's market. For the third quarter, revenue increased meaningfully, up 17% compared to the second quarter. Total revenue increased to $191.8 million in the third quarter compared to $163.4 million in the second quarter. Looking at this on a per active vessel basis, revenue was up approximately 11.5% sequentially. That average day rate was up about 8.5% sequentially with the increase in active utilization driving the remainder of the increase in per vessel revenue. Vessel level cash margin expanded 2.4 percentage points to 41%, well in excess of the 30% target we've talked about in recent quarters, and up nearly 12 percentage points from the third quarter of last year. Our Europe Mediterranean fleet led the way with an 11% sequential improvement in day rates in the UK and Mediterranean. The third quarter is usually one of the seasonally strong quarters in this segment, particularly in the North Sea, given the favorable weather conditions. Festival-level cash margin improved considerably during the quarter, up 15 percentage points sequentially to nearly 55%, more than twice the margin realized in the third quarter of 2021. Utilization also increased meaningfully in this market, up to 95% from 88% in the prior quarter. We've talked about our decision to play the spot market a bit in this region, which proved to be a good strategy this quarter. Drilling and development activity in the North Sea remained robust, where all-time high day rates were realized for anchor handler vessels during the quarter. We are pleased with the results during the quarter and remain bullish on this segment as we look to 2023. West Africa continued to show strong momentum during the quarter. Day rates improved 7% sequentially to about 11,500 per day, now up about 34% from the same period in 2021. Vessel level cash margin was essentially flat during the quarter as active utilization ticked down to 79% from 83%. This drop in utilization was due to a handful of vessels caught between contracts with short interim periods of frictional unemployment. We expect utilization to rebound from this, and this will provide additional cash margin increases in 2023. Nearly half of the fleet acquired from SPO is located in West Africa, and OPEX in this region continues to be higher than the usual due to the acquired cost structure. But we remain confident in realizing the consolidated OPEX energies we've discussed of 25 million per year, which when realized will provide increased operating margins in this region and in Asia Pacific as we progress through 2023. Turning to our Middle East region, during the third quarter, average day rate improved by 3% to about $9,800 per day. Festival cash margin was over 30%, well in excess of anything we've seen in recent years. Although the third quarter day rate progression was modest, on a year-over-year basis, day rates in the region are up nearly 20%, which is a fairly substantial move in a festival market of this nature, which is characterized by a more fragmented owner group and lower specification vessels. Looking forward, the principal customers in this region have recently announced aggressive growth plans for the coming years, which will have positive implications not only for the Middle East, but for the other regions competing for similar tonnage, such as Asia Pacific. This growth will continue to drive day rates in this region, but will also provide for day rate improvement in other regions as vessels are induced to relocate reducing supply in those regions. Turning to the America segment, average day rate improved about 2% sequentially. Utilization decreased by approximately 7 percentage points. There were a variety of factors that drove the reduction in utilization. We added one vessel back to the active fleet as we worked to reactivate ahead of work commencing in 2023. We had a few vessels that came off contract late in the quarter that are commencing new contracts beginning in November. Additionally, we had a handful of vessels come off work to undergo dry dock and mobilize to other regions within the Americas. We expect this fictional employment to moderate as well in the fourth quarter and for utilization to continue an upward trajectory through the remainder of the year and into 2023. Lastly, I'd like to turn to our Asia-Pacific segment. Day rates were up around 35% during the quarter, driven primarily by a number of our larger PSVs rolling onto new contracts. and resetting day rates in the region to new benchmark levels. We are now seeing day rates in line where we have successfully been able to push rates to on larger PSVs in other regions. Our G&A cost during the quarter totaled 27.3 million, which includes approximately 4.3 million in professional fees and other transaction-related expenses associated with the SPO acquisition, along with 6 million of SPO-related G&A expense, Excluding these items, Legacy Tidewater G&A is $16.9 million per quarter compared to a pre-acquisition G&A run rate for Legacy Tidewater of $17 million. The quarterly SPO G&A run rate of $6 million compares to its pre-acquisition run rate of $8.75 million. So on an annual basis, BO G&A is down $11 million compared to our G&A Synergy target of $20 million. We remain confident in our ability to realize the 20 million of G&A synergies related to the acquisition and expect to capture the remaining benefit by the end of the first quarter of 2023. Pre-cash flow for the quarter was 21.9 million compared to a cash outflow of 14.9 million in the second quarter, representing a $36.8 million improvement sequentially. Over the prior few quarters, we've invested in working capital as the business grew and we had some customers that weren't paying timely. Fortunately, we've been able to remedy some of the slow-paying customer issues and the investment in working capital is now moderating. In fact, although revenue grew 17% sequentially, our accounts receivable balance ended the quarter below the second quarter balance. We do expect to continue to make necessary investments in working capital as the business continues to grow. However, we believe the investment will be proportional to revenue growth and that we've now reached a point where the business is positioned to generate meaningful free cash flow on a quarterly basis. We remain confident that market conditions will result in our entire fleet working by the end of 2022, a combination of reactivations and disposing of non-core vessels. We ended the quarter with eight vessels remaining in the held for sale category, which includes one SPO vessel added as part of the acquisition. We also have six vessels classified as stacked. We will evaluate the possibility of reactivating any of the remaining stacked vessels. However, we expect to sell or otherwise dispose of all the remaining stacked and held for sale vessels during the fourth quarter. Vessel layup costs were $1.1 million in the third quarter, slightly above the second quarter. Costs associated with COVID-19 continued to fall. They amounted to about $150,000 in the third quarter. We expect vessel layoff costs and COVID-19 costs essentially to fall to zero in 2023 as the remaining stacked and assets held for sale vessels are disposed. In summary, we are very pleased with the third quarter results. Although we do expect some typical seasonal variation in the fourth quarter and in the first, we believe that the fundamental factors that are driving profitability in our business, robust offshore activity, and an increasingly tight vessel supply market will continue to drive increases in profitability throughout 2023. And with that, let me turn the call over to Piers for an overview of the global markets and the company's performance within.